How Worthless Is It? When Claiming for Shoddy Services Is a False Claim

Many False Claims Act cases allege a violation of some technical provision in a regulation or contract. But a recent decision from the U.S. District Court for the Eastern District of Pennsylvania focuses on a different question: When are a healthcare provider’s services so shoddy that asking the government to pay for them at all is a false claim?

This question was addressed last week in United States v. American Health Foundation Inc., No. 22-cv-02344, in which the Department of Justice sued the operator of three nursing homes under the FCA based on extensive allegations of abuse and neglect at the homes. The government alleged a host of horrid conditions at the facilities, including “that residents … were frequently injured or in danger of becoming injured either due to neglect or allegedly intentional abuse,” and that residents were frequently unattended and provided substandard food. The government further alleged that each facility was understaffed and that employees were often “openly hostile” to residents. As a result, residents were kept in unsanitary conditions and did not timely receive medications and other care. For each of the three facilities, the government provided specific examples of Medicare or Medicaid recipients who allegedly received “grossly substandard care.”

The defendants moved to dismiss the complaint on two grounds: failure to plead falsity and failure to plead materiality. The defendants argued they had not submitted claims that were “false” because the services they provided were not entirely worthless and were not “grossly negligent.” Given the government’s detailed allegations of persistent medical neglect and horrendous living conditions, which included two suicides by Medicare/Medicaid beneficiaries, the court had little trouble accepting that the government adequately pleaded gross negligence, which would render services worthless under prevailing Third Circuit and EDPA precedent. Taken together, the court held that the government’s allegations “crossed the proverbial line in the sand” for determining when substandard services become worthless.

The court also found falsity on an implied false certification theory premised on defendants’ certifications of compliance with the Nursing Home Reform Act (NHRA) and its implementing regulations. The court noted that those regulations are “vast,” but held that compliance is “required for Defendants to continue receiving Medicare and Medicaid payments.” Finding that the government adequately alleged that defendants submitted claims “with full knowledge that [they] fell well short of the NHRA’s requirements,” the court found falsity adequately alleged on this basis as well.

Finally, the court made quick work of defendants’ argument that the complaint did not allege materiality. The court held that NHRA compliance was an express condition of payment. Returning to the litany of alleged harmful, degrading lapses in care, the court stated that whether patients “were fed, changed, washed, lived in a habitable environment, given proper medical care, and prevented by competent staff from killing themselves” went to the very essence of the bargain, and was therefore material. Finally, the court rejected defendants’ argument that there could be no materiality because the government continued to pay for care after state authorities noted significant problems at the defendants’ facilities, finding no evidence that the federal government was aware of those findings.

Though perhaps an extreme example, this case is an important reminder of the “worthless services” doctrine under the FCA, which can impose liability for “grossly negligent” substandard services without reference to any particular contractual or regulatory violation. The court’s decision could be invoked by plaintiffs to support an FCA case based on minor violations of the “vast” NHRA regulations, but the extensive allegations of substandard care should cabin this decision to similarly extreme cases. We here at Qui Notes will continue to monitor this case and report back with any important developments.

© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.